Servicing

The Federal Deposit Insurance Corp. has approved a final rule that raises the Tier 1 capital limit on mortgage servicing rights from 50% to 100%.Other federal banking and thrift regulators will follow shortly, and the agencies plan to publish the joint rule in the Federal Register before the end of July. The effective date of the long-awaited rule is Oct. 1. However, banks can elect to implement the high capital limit on the day the rule is published in the Federal Register. A few institutions have bumped up against the 50% capital limit, and the early effective date will provide relief from having to deduct excess MSRs from Tier 1 capital. The final rule maintains the current practice of requiring institutions to take a 10% haircut when valuing mortgage servicing assets for capital purposes.

Mego Mortgage Corp., Atlanta, has completed its recapitalization, but will take a third-quarter loss of $55 million.The company generated $87.5 million of new equity from various sources. City National Bank, Charleston, W.Va., and Sovereign Bancorp Inc., Wyomissing, Pa., have acquired $10 million in convertible preferred stock. Both have options to acquire $10 million of Mego common stock at $1.50 per share. City Mortgage Services, an affiliate of City National, has acquired the right to service approximately $536 million of mortgages now serviced by Mego and the exclusive right to service up to $1 billion of mortgages originated or acquired by Mego in the future. Another unnamed strategic investor has acquired $5 million in preferred stock, while other private investors have purchased $15 million of Mego's common stock at $1.50 per share. In addition, Mego exchanged $79 million of senior subordinated notes for $37.5 million of preferred stock and $41.5 million in new senior subordinated notes. Mego also announced that Champ Meyercord, formerly a senior investment banker with Greenwich Capital Markets, is the company's new chairman and chief executive. Mr. Meyercord will be heading up a company that will lose at least $55 million for its fiscal third quarter, which ended on May 31. This loss comes from additional reserves against loans held for sale, writedowns of capitalized fees and expenses resulting from the recapitalization, and a writedown in the carrying value of mortgage-related securities.

The House is set to vote on a private mortgage insurance reform bill July 14.Lawmakers have resolved several sticking points that had previously endangered the bill. Once voted on in the House it will move to the Senate, where mortgage industry lobbyists are predicting easy passage. "The bill provides a happy medium for both servicers and borrowers," said Karen Kapen, a lobbyist for the Mortgage Bankers Association of America, which supports the legislation. The bill, also backed by the Mortgage Insurance Companies of America, calls for automatic cancellation of private MI once a borrower's equity reaches 22%, although creditworthy borrowers can cancel at 20% equity. Servicers will notify borrowers once these equity levels have been attained. The proposed legislation provides a federal preemption, except for those states that already have private MI laws, including California, Connecticut, Maryland, Minnesota, Missouri, New York, and Texas. There is no federal regulator under the proposed MI reform bill, which means the courts will have to resolve any consumer or lender complaints.

First Commercial Mortgage Co., a subsidiary of the Little Rock, Ark.-based First Commercial Bank, has purchased $1.2 billion in loan servicing rights representing 24,000 mortgages on properties in Arkansas, Texas, Kansas, and Oklahoma.Jack Fleischauer, chairman and CEO of First Commercial Bank, said the bank's size and the similarities between its portfolio and the one recently acquired made the transaction attractive. First Commercial is merging with Regions Mortgage. Once that merger is completed, the combined portfolios of Regions Mortgage and First Commercial Mortgage will total about $23 billion, making Regions one of the top 35 mortgage servicers in the country.

Southern Pacific Funding Corp., Lake Oswego, Ore., has announced the completion of a $650 million securitization by its wholly owned subsidiary, Southern Pacific Secured Assets Corp. The mortgage loan asset-backed pass-through certificates, Series 1998-2 consisted of eight classes (plus an interest-only certificate with a notional balance of $178.4 million), with fixed-rate yields ranging from 6.04% to 6.76%.The yield on the A-1 floating-rate class was 17 basis points above the London Interbank Offered Rate. The lead underwriter was Lehman Brothers Inc., and Morgan Stanley Dean Witter, Prudential Securities Inc., and First Union Capital Markets Corp. were the co-managers. SPFC will be the master servicer of the certificates. Its website address is http://www.sp-funding.com.

Prepayment rates on most 30-year Freddie Mac mortgage-backed securities with coupons of 7.5%-8.5% slowed by 10%-15% in the June reporting period, according to the Bear Stearns Prepayment Commentary.Analysts Dale Westhoff and Bruce Kramer cautioned, however, that new 7.5s were 76 basis points in the money from February through May and that the 7.5% coupon "remains extremely vulnerable to brief flirtations" with lower interest rates. The 76-bp incentive "is just at the threshold for a full refinancing response, so any sustained move to lower mortgage rates would trigger an immediate reaction in this coupon," they said. The Bear Stearns analysts pointed to the fact that speeds for seasoned premium Freddie Mac MBS held strong, which they linked to the resurgence of home prices in California. They also cited surprisingly strong prepayment rates in the cusp and discount sectors. Overall, the analysts said the report confirms that "speeds will decay in a range-bound environment," but warned that it "should not be taken as a signal that prepayment risk is also declining."

Thornburg Mortgage Asset Corp., Santa Fe, N.M., has affirmed its strategy of investing in high-quality adjustable-rate mortgage securities and avoiding investments in interest-only strips, servicing, and fixed-rate mortgages.The prepayment rate on the company's portfolio "declined modestly" in June, Thornburg said. "Fully 94% of the company's ARM assets are securitized in order to minimize credit exposure and reduce funding costs," the company said. Thornburg said it does not own any IO strips, mortgage loan servicing, or 15- or 30-year fixed-rate mortgage products and does not intend to buy such products in the future. The company also said it has no intention of realizing any losses on the sale of its portfolio and "is not under any pressure to sell any assets."

Criimi Mae Inc., Rockville, Md., has purchased (or agreed to purchase) approximately $130 million of subordinated commercial mortgage-backed securities in two transactions.About $65 million of the CMBS were issued by Morgan Stanley Securities Corp., and the rest were issued by Mortgage Capital Funding Inc., a subsidiary of Citicorp. Criimi Mae president H. William Willoughby said investors should note the differences in investment strategies between Criimi Mae and residential mortgage real estate investment trusts. "Criimi Mae's financial results are largely insulated from any negative impact of prepayments for several reasons," Mr. Willoughby said. "First, [interest-only] strips represent less than 2% of total assets at March 31, 1998. Second, prepayment prohibitions or penalties on commercial mortgages serve to maintain CMBS yields. And finally, Criimi Mae acquires CMBS at a discount to face value." Prepayments are expected to increase the value of Criimi Mae's subordinated CMBS by making it more likely that the subordinated tranches will be fully repaid, he said.

With delinquencies rising, the Mortgage Bankers Association of America is urging homeowners to establish an emergency fund equal to three months' income to handle unexpected financial hardships and home maintenance costs.The MBA said the emergency fund should include money for making mortgage payments in the event of illness or loss of income. While unexpected repair bills contribute to financial problems, MBA executive vice president Paul Reid said that illness, loss of employment, and marital problems cause more people to lose their homes than all other reasons combined. The MBA's website address is http://www.mbaa.org.

Capstead Mortgage Corp., Dallas, has reported that the recently completed repositioning of its mortgage securities portfolio has resulted in losses of approximately $255 million and a reduction in the company's earnings potential."Due to the continued high level of mortgage prepayments and the possibility of further declines in long-term interest rates, we concluded it was prudent to substantially reduce the company's exposure to mortgage prepayments," said Capstead chairman and chief executive officer Ronn K. Lytle. The company sold its entire $977 million investment in interest-only securities, as well as $659 million of Fannie Mae and Freddie Mac adjustable-rate mortgage securities and $656 million of Ginnie Mae ARM securities, Mr. Lytle said. In addition to the loss of $255 million, the company said it expects to take an impairment charge of about $45 million on its mortgage servicing portfolio due to high prepayment rates. "The total charge will reduce total stockholders' equity from $857 million at March 31, 1998 to approximately $705 million at June 30, 1998," Mr. Lytle said. He said the company's net interest margin is "unlikely to improve" in the near future. "Additionally, the decreased asset levels and the disposition of the interest-only securities, while prudent from a risk management perspective, have diminished the company's earnings potential," he said. Capstead's third-quarter dividend is expected to be "considerably lower" than the previous estimate of 40-45 cents, Mr. Lytle said.